Legal Definitions - mutual-fund wrap account

A mutual-fund wrap account is a type of investment account where a client pays a single, comprehensive fee, typically calculated as a percentage of the total assets under management. This single "wrap" fee covers a range of services, including investment advisory fees, administrative costs, and often the transaction fees associated with buying and selling the mutual funds within the account. It simplifies the fee structure for investors who hold a portfolio primarily composed of mutual funds, as they receive integrated management and services for one consolidated charge rather than paying separate fees for each service or transaction.

Here are some examples to illustrate how a mutual-fund wrap account works:

• Example 1: Retirement Savings for a Young Professional

  Sarah, a 30-year-old software engineer, wants to start saving aggressively for retirement but has limited time to research individual funds or manage trades. She opens a mutual-fund wrap account with a financial advisor. For an annual fee of 1% of her total assets, the advisor constructs a diversified portfolio of mutual funds tailored to her long-term goals and risk tolerance. This 1% fee covers the advisor's ongoing management, any rebalancing of her portfolio, and all transaction costs incurred when the advisor buys or sells mutual funds within her account. Sarah appreciates the simplicity of seeing one clear fee that covers all aspects of her investment management.

  This illustrates the term because Sarah pays a single, asset-based fee (the "wrap" fee) that encompasses multiple services—investment advice, portfolio management, and transaction costs—for her mutual fund holdings.

• Example 2: Managing Inherited Wealth

  After inheriting a substantial sum, David wants professional help managing the funds, which he plans to invest primarily in various mutual funds for growth and income. He engages a wealth management firm that offers a mutual-fund wrap account. The firm charges a 0.8% annual fee on his account balance. This fee covers the firm's continuous monitoring of the market, strategic adjustments to his mutual fund allocations, quarterly performance reports, and all trading commissions associated with the mutual fund transactions. David finds this structure transparent and convenient, as he doesn't have to track individual trading costs or advisory bills.

  This demonstrates the concept as David benefits from a unified fee that wraps together all the costs of managing his mutual fund portfolio, including advisory services and trading expenses, into one predictable charge.

• Example 3: Small Business Owner's Investment Portfolio

  Maria, a busy entrepreneur, has accumulated savings and wants to invest them professionally without the hassle of managing multiple fees. She opts for a mutual-fund wrap account with an investment firm. Her account, primarily invested in a mix of equity and bond mutual funds, is charged a 1.25% annual fee. This fee covers the firm's ongoing financial planning advice, the selection and monitoring of suitable mutual funds, and all brokerage commissions for trades executed within her account. Maria values the all-inclusive nature of the fee, which allows her to focus on her business while her investments are professionally managed.

  This example highlights the mutual-fund wrap account's benefit of consolidating various charges—advisory services, fund selection, and trading fees—into a single percentage-based fee, simplifying the financial management for Maria.